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Self-employed individuals who operate unincorporated businesses file their net business income or loss as part of their personal income tax returns. In years where there is a net business loss, the IRS specifies how it is to be reported, based on other sources of income and the types of business expenses creating the loss.

Net Business Losses

Self-employed business owners can deduct legitimate business-related expenses against their revenues to arrive at the net business income for the year. This net income will add to the taxpayer's other sources of income and will be taxed at the marginal tax rate. The net income is also the basis on which self-employment taxes are calculated. In years where the business has more expenses than income, the IRS allows some or all of the loss to be netted against other sources of income, reducing the taxpayer's overall tax liability.

Home Office Expenses

Home office expenses are a special category of business expenses that are treated differently than direct business expenses in years where there is a business loss. Home office expenses can be claimed by businesses in situations where the home office is the main place of business or is used consistently and regularly by the business. A portion of the home's expenses, such as mortgage interest, property taxes, utilities, and repairs and maintenance, can be used as a business expense. In years where the home office expenses would create or increase a net business loss, only those that would otherwise be deductible if there was no business would be allowed. The two main categories are mortgage interest and property taxes. If there is a loss after those two categories are deducted, the rest of the home office expenses can be carried forward to next year to use against business income.

Claiming Net Business Losses

Business income and expenses are calculated and reported on Schedule C. Attachments to Schedule C allow the calculation of business use of personal vehicles and depreciation on both business assets and the home office. The net allowable business income or loss is then transferred to the 1040 return and forms part of taxable income. The backup business expense receipts and proof of revenues are not included with the return when filed but should be kept for a minimum of seven years in case of an audit.

Carryover Rules

If the business loss cannot be deducted against other sources of income because there is not enough of the latter, the loss can be carried back for two years or forward for 20. This means that, if there was taxable income in either of the past two years, the returns can be amended and the loss netted against the income, resulting in a tax refund. If there was no taxable income in the past two years, the losses may be carried forward for 20 years or until there is a year with taxable income to claim the losses against. Although the taxpayer can choose not to carry the loss back, it almost always makes sense to do so if there is enough income, because of the short time frame for carryback.

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About the Author

Angie Mohr is a syndicated finance columnist who has been writing professionally since 1987. She is the author of the bestselling "Numbers 101 for Small Business" books and "Piggy Banks to Paychecks: Helping Kids Understand the Value of a Dollar." She is a chartered accountant, certified management accountant and certified public accountant with a Bachelor of Arts in economics from Wilfrid Laurier University.

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Mohr, Angie. "How Must a Self-Employment Net Loss Be Reported on a Tax Return?" Small Business - Chron.com, http://smallbusiness.chron.com/must-selfemployment-net-loss-reported-tax-return-10186.html. Accessed 18 December 2018.

Mohr, Angie. (n.d.). How Must a Self-Employment Net Loss Be Reported on a Tax Return? Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/must-selfemployment-net-loss-reported-tax-return-10186.html

Mohr, Angie. "How Must a Self-Employment Net Loss Be Reported on a Tax Return?" accessed December 18, 2018. http://smallbusiness.chron.com/must-selfemployment-net-loss-reported-tax-return-10186.html

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